This is a story of a girl called Ann and how she almost destroyed her startup in 5 easy steps.
Ann (not her real name) did everything that she was meant to. She went out into the market and did her customer discovery. She realised that there was a need for her services. Let’s say she ran a kindergarten.
She opened the first one. It was soon packed. Children loved her. Parent loved her. Staff respected her. Soon she opened a second and a third branch. She realised that she was on to something and also that she didn’t have the skills that she needed to run a successful startup.
So she reached out to the government and went on a six month startup bootcamp that taught her the essentials of marketing and business strategy. She opened the fourth and fifth centre. Everything was rocketing along.
Six months later she was on the verge of bankruptcy. She didn’t have enough money to make payroll or the rents for centres. Parents were unhappy and kids didn’t want to go to school. Staff were resentful and apathetic. They left almost as soon as they were hired.
What went wrong?
Ann failed in five big areas
One of the things that Ann was very good at was looking to see what had worked in her previous roles in education centres and from her training as a psychologist.
Everything was beautifully labelled. There were checklists and forms, procedures and processes. It was all hollow.
Everybody in the five centres worked directly for her. That’s 100 people were her direct reports. There were no layers of supervisory or junior management between her and the front line staff.
As a result she got overwhelmed and lost focus on what needed to be achieved and focused on the urgent issues of the day.
It was then surprisingly tough to bring in team leaders and centre managers to run and manage each house for her. Who could do things as well as she could? Who could be trusted? As we did so the number of fires that we had to deal with dropped dramatically.
Sure the people we hired didn’t do as good a job as Ann. At first they didn’t. Being only 80% as good to start with they still solved many of the problems that Ann ha had to solve before. That freed up her time to help them solve the remaining 20% and suddenly Ann was able to spend her time on the bigger issues not the minutiae of managing 100 staff.
Ann is a wonderful warm and trusting person. This is what makes her so successful with the parents and children. It’s why she can fill her centres with no trouble,
Ann was somewhat naive when she assumed that if she hired people to do the job they would do the job. She wrote the SOPs, worked out how to do the jobs on the ground (actually it was the other way around) and then left the staff to do it.
The trouble was they didn’t do it. They did things differently. They did things their own way. They did things partially. They didn’t do things at all. The system that Ann thought she had built wasn’t a system at all.
What she’d done was that instead of delegating responsibilities she’d abandoned them. “I have someone to do that. I don’t need to do it any longer” was what she said to me on one of our early meetings. She’d absented herself from what was meant to happen and so the person failed in their role.
What she should have done is to have held each person that worked for her accountable and responsible.
One of the ways that we did this was to use Michael Gerber’s ideas of position agreements. This takes the traditional job description and shows how the position delivers value to the customer and the company and what needs to be done to deliver that value. Then manager and staff sign it.
For Ann part of this included the regular monitoring of how the staff were performing. As we rolled this out we got more and more compliance of staff with the procedures and the staff churn dramatically improved.
There was recently a childcare centre reported where staff tied up and gagged problem children and put them in a separate room. The just before home time they take them out and give them sweets so they were happy when parents picked them up. We never had those problems, but given the way that we had run the business we were lucky to have avoided them
When we first looked at the books…. Well there weren’t any. I asked Ann how much profit we were making. She said that we were making 10–12% margin but couldn’t really explain why she was chronically and acutely short of cash.
Once we gathered all the receipts and invoices and created some initial accounts it turned out that her margin was actually -7%.
Why was she so off?
She had no system for collating all the numbers and putting them into a form where she could quickly judge her financial performance. Setting up an accounting and bookkeeping system is too hard/difficult for many entrepreneurs. So long as they are making sales they feel that they are ok.
The problem was that the more sales that Ann made the faster she was losing money and she didn’t know this!
Performance as a business was judged on the number of seats she had and how many of those were filled. Performance was judged by the amount of cash that came in each month and the balance of her bank account.
Many entrepreneurs keep managing like that for months after they have started. Things are going well. They haven’t had any problems. They don’t see the need to leave the critical issues of sales and operations to focus on getting the accounts looking right.
If they have no problems everything must be ok.
In reality the iceberg is very close and ignorance is just a fog that hides how dangerous it is for even longer.
90% of the staff stayed with Ann’s company for 3 months or less. She had to replace every position 4 times a year.
Think about the time and effort that took. Think about the quality of service and customer satisfaction! When I chose kindergartens for my kids the key criteria (after lots of bad choices) was how long the teachers had been at the school.
“Why have we got this problem?” I asked. “We hire school leavers and they see it as a temporary job before they get a real job” Ann answered. “Why do you leave so often I asked some of the teachers?”
“Ann is nasty and mean and doesn’t pay us enough and we have to work too hard!”
There was a big disconnect. Ann had found a short term and temporary solution to get her business off the ground in the early days. Hire cheap workers to demonstrate the MVP and keep costs down.
It was another time bomb. As time went by it started causing increasing damage and Ann didn’t realise that a solution had morphed into a problem.
She fixed this with many of the actions in previous points. lso there was a concerted push to say this is who we are. This is what the people who are at my business are like. And this clear statement of purpose filled the void that had existed up to that point. The staff responded and churn slowly dropped.
“So what is the big vision?” I asked “What is the exit strategy?” Ann was clear and determined “I want to look after children.”
Hmmm. For a long time Ann couldn’t really articulate where the company was going. So it just headed in a semi random direction. We have some spare cash. Let’s open a new centre with it.
Why they should open a new centre, why more children coming in would be a good thing was never really considered.
Ann didn’t have much of a clue as to where she wanted the company to be in 5 years or even what it would look like when it was finished. Another friend of mine in the education sector started a school about 30 years ago. She said it was always very clear. I wanted to create a wonderful school on humanistic principles that would b as good as an English grammar school. And I wanted to create a local version of Cheltenham Ladies College. And she did exactly that.
Ann couldn’t articulate that vision and so we had a bunch of mismatched centres serving slightly different segments all with different pricing. What looked coherent from the outside was the result of hundreds of sub optimal ad hoc decisions that had no guiding principle.
Eventually “I want to create a great kindergarten that gives working class kids the same start in life that middle class kids have”. Once she figured that out lots of things changed fast as decisions reinforced and supported each other.
Ann got many things wrong. Perhaps the worst was how she approached leadership. She’s a charismatic person. When you meet her in her element she has an aura about her that makes you feel that anything is possible.
The thing is her leadership, right now, is the hands on kind. She needs to be in the centre’s being a shining example.
As the business grew she though the role of a leader i her company was to move to head office and be a ‘big boss’. Honestly she wasn’t very good at that. A bureaucrat she is not.
She tried managing in a style that didn’t fit her or the company. Staff cold cold, formal edicts from her in her air conditioned office. She was unapproachable and aloof as she struggled to handle the administrative chaos.
“Where can you do most good?” I asked. “I need to solve these problems” she said. “Tax, legal claims, unfair dismissals, overdue rent, government inspections”
Those were problems she had to solve. Frankly they were management problems that could be solved by any general manager. Where could she do the most good to drive the company forward?
For her it was running the centres and building them into great places to work that were filled with happy and smiling children. She found ways to compensate for her managerial weaknesses and filled that hole. Someone else takes care of those problems now. Funnily enough there aren’t nearly so many.
What Can we Learn from Ann’s Story
This is the story of Ann. Some of the issues are generalizable to all entrepreneurs. Some are specific just to her.
Stepping back the real problems came because Ann tried to run her business as a startup. Once she had product market fit and that she could deliver value to her customers at a good price she needed to start the process of changing it from a startup to a small company.
When you have something that works you need to stop being a startup. Staying a startup will kill you.
A startup is a chaotic type of company as it is still trying to figure out the best way to make money and grow. Once you have figured that out it’s time to start putting on the suits and building the spreadsheets and SOPs.
Structure, order and consistency are what is needed to create a company that will keep growing profitably and happily.
The big mistake that most entrepreneurs make is no recognising the change that they need to make and then starting the process to leave entrepreneurism behind to business ownership and management.
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